Documents
Resources
Learning Center
Upload
Plans & pricing Sign in
Sign Out

Chinas Outward FDI Past and Future+

VIEWS: 8 PAGES: 36

									                     China’s Outward FDI: Past and Future+


                                  Leonard K. Cheng∗ and Zihui Ma#
                                                  July 2007


                                                   Abstract


     In this paper we provide a systematic analysis of the size and composition of
China’s outward FDI in 2003-2005. Despite the attention given to China’s recent
outward FDI and the prospect that it will continue to surge upward, its investment
flows and stocks were smaller than those of some small industrial economies and
some emerging developing economies as of 2005. The bulk of China’s FDI was made
by firms owned by or associated with different levels of governments, including its
largest multinational companies. By the end of 2005, business services accounted for
the largest share of China’s outward FDI stock (28.9%), to be followed by wholesale
and retail, mining and petroleum, transportation and storage, and manufacturing. The
true breakdown of the destination of China’s FDI was basically unknown because a
predominant share of its FDI in recently years was made in the world’s tax havens,
     An empirical analysis reveals that the host economies’ GDP had a positive impact
whereas their respective distances from China had a negative impact on attracting FDI
from China. Their per capita GDP had no impact on FDI flows but a negative impact
on FDI stocks. Cultural proximity was a positive factor in attracting China’s FDI to
the host economies that speak the Chinese language.
     China’s future FDI outflows are forecast based on its own past experience,
international experience, and Japan and South Korea’s experience with FDI outflows.
Our baseline forecasts based on the experience of many FDI source economies
indicate that China’s aggregate FDI outflow will reach US$20 billion around 2008,
US$30 billion in the early 2010’s, and US$50 billion by 2015. In more optimistic
forecasts based on the experience of Japan and South Korea, the first two thresholds
will be reached one year earlier and the third threshold will be reached five years
earlier.




+
  We would like to thank Lee Branstetter, Rob Feenstra, Martin Feldstein, Shang-Jin Wei, and other participants of
the “Pre-Conference on China’s Growing Role in the World Trade” held at the National Bureau of Economic
Research, Cambridge, Mass., on October 14, 2006, for their encouragement and suggestions. We are grateful to
Bih Jane Liu and Chao-Cheng Mai for their comments and suggestions on this draft.
∗
  Hong Kong University of Science and Technology
#
  Renmin University, China



                                                        1
I.        Introduction
     China’s has achieved remarkable success in attracting foreign direct investment
(FDI) since the earlier 1990s. It became the largest recipient of FDI among
developing economies for the first time in 1993 and then became one of the top three
recipients of FDI in the world in 2003 – 2005, and No. 4 in 2006 based on preliminary
estimates.1 Perhaps as a reflection of this success, there are many papers written on
the various aspects of China’s inward FDI. In contrast, China’s outward FDI up to
now is small, and thus not as much systematic research has been done on it.
     Nevertheless, as China is rapidly integrating with the global economy, its outward
FDI has picked up in recent years. More importantly, perhaps, several major
acquisition efforts have brought media attention to China as a source of FDI. Among
them, Lenovo’s acquisition of IBM PC announced in December 2004 could arguably
be the most eye-catching example of these efforts. The other highly visible cases
included the electronic appliance manufacturer TCL’s acquisition of France’s
Thomson Electronics in 2004, white-goods manufacturer Haier’s building of plants in
the US since the late 1990s, CNOOC’s failed attempt to acquire US oil company
UNOCAL in 2005, and Nanjing Automotive’s success in acquiring UK’s MG Rover
Group in 2005.2 The energy crunch in 2006 also witnessed stories about China’s
effort to invest in oil companies in the world, in particular in Russia, Central Asia, and
Africa, giving an impression that resource grapping was a key driving force behind
China’s outward FDI.
Background
     A description of China’s outward FDI from 1979 to 1993/94 can be found in Cai
(1999). The country’s annual FDI outflow grew from virtually zero in 1979, when

1
  According to UNCTAD’s World Investment Report 2004 (Annex table B.1, pp. 367 and 370), in 2003 China’s
inward FDI of US$53.5 billion ranked No. 1, before both France (US$47 billion) and the US (US$29.8 billion), the
second and third largest recipients of FDI in that year. However, in World Investment Report 2005 (Annex table
B.1, pp. 303) the US figure for 2003 was revised to become US$56.8 billion, implying that China would rank No.
2 in that year after the US. In 2004, China’s inward FDI (US$60.6 billion) ranked No. 3 after the US (US$95.9
billion) and United Kingdom (US$78.4 billion). According to UNCTAD Investment Brief Number 1 2007, China
was ranked No. 2 (after the U.S.) in 2004, No. 3 (after U.K. and U.S.) in 2005, and No. 4 (after U.S., U.K. and
France) in 2006. The 2006 data are preliminary estimates.)
2
  Even though Shanghai Automotive started to have some cooperative arrangements with MG Rover involving
intellectual property rights, in the end the British auto maker was sold to Nanjing Automotive after the former went
into bankruptcy [ http://www.zydg.net/magazine/article/1671-4725/2005/16/222961.html].



                                                         2
China embarked upon its open door policy, to US$628 million in 1985, and to
US$913 million in 1991, before shooting up to US$4 billion in 1992, the year in
which China’s paramount leader Deng Xiaoping made an important tour to South
China tour to reaffirm China’s commitment to its reform and open door policy in the
aftermath of the Tiananmen crackdown in 1989.
       Notice that the FDI statistics used by Cai were provided by UNCTAD and
collected by the IMF based on balance-of-payments accounting. Relative to the
UNCTAD statistics, outward FDI statistics provided occasionally by the Ministry of
Commerce (MOFCOM) (and its predecessor MOFTEC) up to 2002 represented
                                3
serious underestimates.             Among other things, the MOFCOM excluded investment
projects not screened and approved by relevant government agencies, and did not
include investment made after the projects’ initial approval, such as the plough back
of retained earnings. However, from 2002 onward, MOFCOM’s FDI statistics have
been collected in accordance with OECD definitions and IMF’s balance-of-payments
guidelines. Thus, if there were still discrepancies between MOFCOM and UNCTAD’s
FDI statistics, the discrepancies from 2003 should be smaller than before.
       By the end of 1996, China’s total stock of FDI outflows was over US$18 billion.
It surpassed South Korea (US$13.8 billion) and Brazil (US$7.4 billion) to move up to
the number four position among developing economies, behind Hong Kong (US$112
billion), Singapore (US$37 billion), and Taiwan (US$27 billion) (Cai, 1999, p.861).
       For the period of 1979-93, almost two thirds of China’s FDI was found in Asia,
including 61% in Hong Kong and Macau. The other regions in descending order were
North America (15%) Oceania (8%), Central and Eastern Europe (5%); Africa (2%);
Latin America (2%); Western Europe (2%) (Cai, 1999, p.864). 60% of China’s FDI up
to 1994 was in the services sector, mainly to service and promote its exports. The
remaining FDI was in natural resources (25%) and manufacturing (15%, mainly in
textiles and clothing, and other labor-intensive industries, located primarily in Africa,

3
    As indicated in Cai (1999, p.857), some argued that the actual stock of FDI outflows from the beginning of
China’s open door policy to the late 1990s were between US$80 billion and UD$100 billion, even though only
US$15 billion was officially approved.



                                                       3
Asia and the Pacific).
    Hong and Sun (2004), also using UNCTAD’s FDI statistics, reported that the
stock of China’s outward FDI flows reached about US$36 billion by end the of 2002,
ranked No. 6 among 118 developing economies. They found that China’s aggregate
FDI outflows during 1988-2002 were quite similar to those of South Korea during the
same period, and to Japan’s outflows in the period of 1968-1982. The sectoral
composition of China’s FDI, with 40-50% of shares in the non-trade category, was
similar to that of South Korea in the 1980s and that of Japan in the 1960s and 1970s.
    Hong and Sun found that the motives, destination, financing, and mode of entry
of Chinese investors had undergone changes in the 1990’s. For example, even though
natural resources were still an important motive, in the late 1990s increasingly more
Chinese firms used FDI to acquire advanced foreign technologies and managerial
skills, which had the effect of increasing their investment in the U.S. Also, from 1992
to 2001, Chinese firms increasingly cultivated their comparative advantages in Asia,
Africa, and Latin America. In 1997-2001, Africa became the second largest regional
destination of Chinese FDI outflows, only after Asia, as it received 24.1% of the total.
Since the mid-1990s, more and more Chinese firms used listing in overseas stock
markets (Hong Kong and New York) to raise equity capital and to enhance their
international reputation. What they found the most striking, however, was mergers
and acquisitions gradually became the main form of investing overseas.


Related Literature
    Since China was a developing economy which was generally short of capital and
foreign exchange, its outward FDI requires some explanations. Cai (1999) identified
four motives for Chinese FDI: (a) market; (b) natural resources; (c) technology and
managerial skills; and (d) financial capital. These motives were later augmented by
other researchers. For instance, Deng (2004) identified two additional motives: (e)
strategic assets (e.g., brands, marketing networks), and (f) diversification. Clearly,
because China was itself a low-cost production base, cost minimization was not a
major motivation of Chinese FDI overseas.


                                           4
       Alternative routes taken by China and its national firms to acquire the above
assets and resources have received attention in fields of international business and
politics. For example, Child and Rodrigues (2005), on the basis of case studies,
examine the pros and cons of three alternative routes taken by Chinese firms in
seeking technological and brand assets: (a) Original Equipment Manufacturing (OEM)
and joint ventures; (b) mergers and acquisitions; (c) organic international expansion.
       As a world factory, China will become increasingly more dependent on the global
supply of raw materials and energy. Thus, China’s FDI in natural resources seems to
have captured the world’s imagination, given many reports of billion dollar deals in
2006 and 2007 involving oil producing African countries (e.g., Taylor), central Asian
countries (e.g., International Herald Tribune, October 27, 2006), and elsewhere.4 As a
reflection of Chinese effort to secure the supply of raw materials and energy for its
national economy, there is a literature on “resource diplomacy,” which was according
to Zweig (2006) defined as “diplomatic activity designed to enhance a nation’s access
to resources and its energy security.” While the first and foremost resource for China
is oil,5 the country is also in great demand for other minerals such as copper, bauxite,
uranium, aluminum, manganese, and iron ore, etc. (see, e.g., Taylor (2007)). As
pointed out by Taylor, “the strategy chosen is basically to acquire foreign energy
resources via long-term contracts as well as purchasing overseas assets in the energy
industry.” These strategic choices also apply to other key natural resources.

4
  To what extent the news reports will be reflected by official FDI statistics remains to be seen, as China’s 2006
FDI statistics by sector have yet to be released. Let’s use two examples to compare the FDI statistics as reported in
the 2005 Statistical Bulletin issued by the Ministry of Commerce against the statistics quoted in the newspaper
reports. For instance, the total stock of Chinese FDI in Algeria by the end of 2005 as reported in the Bulletin was
US$171 million, much less than the value of a single deal involving China National Petroleum Corporation (CNPC)
as reported in Taylor : “In 2003 CNPC purchased a number of Algerian refineries for $350 million and signed a
deal to explore for oil in two blocks.” What could be the explanations of the big difference in FDI statistics besides
misreporting on either side or on both sides? Did CNPC take a long time to implement its deal, so that by the end
of 2005 only a fraction of the transacted amount was actually invested? Or did CNPC sell part or all of its interests
before the end of 2005? Or was part or whole of the investment be considered portfolio investment, and thus not
included as direct investment? As another example, according to Taylor China’s investment in Sudan was
estimated at $4 billion. However, by the end of 2005, China’s official statistics showed only a stock of US$352
million, which was less than Taylor’s report of US$600 million that Sinopec and CNPC jointly paid in November
2005 for drilling rights to an oilfield in the country. As another example, according to Taylor China’s investment in
Sudan was estimated at $4 billion. However, by the end of 2005, China’s official statistics showed only a stock of
US$352 million, which was less than Taylor’s report of US$600 million that Sinopec and CNPC jointly paid in
November 2005 for drilling rights to an oilfield in the country.
5
    According to Taylor, China surpassed Japan in 2003 to become the world’s second largest user of oil products
after the US.




                                                         5
    Researchers in both the fields of international business and politics recognize the
importance of the role of the Chinese government in China’s outward FDI. This point
would not be hard to appreciate because, as we shall see below, until now the lion’s
share of China’s outward FDI has been made by firms that have close relationships to
various levels of government. Moreover, overseas investment by Chinese private
firms requires government approval. Partly as a result of the perceived need to secure
key natural resources and technologies through ownership, and partly as a result of
increasingly abundant foreign reserves, China started to encourage its national firms
to “go global” in 2003. The government not only relaxed the approval process of
outward FDI, but also provided incentives for FDI in target industries.
    Stimulated by international attention on some successes and failed attempts of
buyout by Chinese multinational firms, Antkiewicz and Whalley (2006) discussed
three policy issues about cross-border mergers and acquisitions. They were (a)
government subsidization of cross-border mergers and acquisitions; (b) transparency
of the acquiring firms; and (c) national security concerns of OECD countries whose
firms are the targets of buyouts.
    The purpose of this paper are three-fold: (a) To provide a systematic analysis of
the size and composition of China’s outward FDI in 2003-2005, the period over which
such data are available from China’s Ministry of Commerce; (b) to uncover the
determinants of the direction and amount of this outward FDI, and (c) to forecast the
amount of China’s future outward FDI based on its own past experience,
international experience, and Japan and South Korea’s experience with FDI outflows.
    The paper is organized as follows. The next section describes and analyzes the
pattern of China’s outward FDI in 2003-2005, including amount, sectoral composition,
geographical distribution, and the status of investing firms in China’s economy.
Section III attempts to uncover the determinants of the direction and amount of
China’s outward FDI with the help of gravity equation regression analysis. Section IV
provides forecasts for China’s future outward FDI. The final section summarizes and
indicates directions for further research.




                                             6
I.      Patterns of China’s Recent Outward FDI
     From this point onward, we shall omit the adjective “outward” if the meaning of
FDI is clear without it. In this section, we first present the amount of China’s
aggregate annual FDI flow from 1982 to 2006, and its global shares in aggregate FDI
flows and stocks from 2002 to 2005. After that we shall examine the sectoral
composition and geographical distribution of Chin’s FDI flows and stocks, to be
followed by an analysis of the organizational background of the Chinese investors.
Note that the difference between the FDI stocks (measured as of end of year) of two
successive years is not necessarily equal to the FDI flow of the later year, as one
might expect, due to reasons such as re-valuations of the stock of investment.


II.1.    Amounts and Global Share of China’s Outward FDI
     The flow of China’s FDI from 1990 to 2006 is depicted in Figure 1, where the
data from 1982 to 2001 were based on UNCTAD’s World Investment Reports while
data from 2002 were provided by MOFCOM based on international definitions and
data collection methods. Despite of the rapid growth of China’s FDI in recent years, it
shares of the world’s total FDI remained very small. As shown in Table 1, China’s
FDI flow in 2002 and 2003 accounted for a miniscule 0.5%, but it was tripled to
1.57% in 2005. China’s FDI stock over the same period accounted for an even smaller
percentage of the world’s total FDI stock. As shown in Table 2, China’s global share
in 2002 was 0.29%, and it grew to 0.54% in 2005.
     As a matter of comparison, China’s FDI flows and stocks were not only much
smaller than those of the world’s major industrial economies, but also smaller than
some small developed economies. For instance, its FDI flow in 2005 at US$12.26
billion was more than doubling its flow in 2004, but still below those of Ireland
(US$12.93 billion) and Norway (US$14.46 billion). When compared with developing
economies, its flow in 2005 exceeded Singapore (US$5.52 billion) for the first time in
history. China’s FDI stock at the end of 2005 stood at US$57.2 billion. As a latecomer
in outward FDI, this stock was slightly below those of Austria (US$67.24 billion),
Brazil (US$71.56), and Finland (US$74.41), and significantly behind Singapore


                                           7
(US$110.9 billion) and Russia (US$120.42 billion).
    However, given the expectation that China’s FDI flows in the future will continue
to grow, its rankings by flow and stock can be expected to move up.


II.2.        Sectoral Composition of China’s Outward FDI
    As seen in Table 3, in 2005, 40.3% of China’s FDI flow went into business
services; 18.6% went into manufacturing (mainly, telecom equipment, computer and
other electronic equipment, transportation equipment, general equipment, textiles,
wood products, metallurgy) ; 18.4% went into wholesale and retail (mainly, imports
and exports); 13.7% went into mining and petroleum; 4.7% went into transportation
and storage. Also given in Table 3 are the sectoral compositions of FDI flows in 2003
and 2004. As can be seen, mining and petroleum accounted for close to almost one
half in 2003 and one third in 2004, but dropped to less than 14% in 2005. In contrast,
business services rose from less than 10% in 2003 to over 40% in 2005.
    By the end of 2005, business services accounted for the largest share of China’s
outward FDI stock (28.9%), to be followed by wholesale and retail (20%), mining and
petroleum (15.1%), transportation and storage (12.4%), and manufacturing (10%).


II.3.        Geographical Distribution of China’s Outward FDI
    In 2005, China’s FDI flowed into 163 countries and regions spread over all
continents except the Antarctica. Tables 4 and 5 show the geographical distributions
of China’s FDI flow and stock, respectively. In 2005, 52.7% of China outward FDI
flow was destined for Latin America, exceeding the share of Asia for the first time in
history, but much of the investment in Latin America was made in three tax havens
there: Cayman Islands, British Virgin Islands, and the Bahamas. Investment in these
and other tax havens typically results in re-investment in other host economies,
including China itself. Asia ranked second as a destination of China’s FDI, and
accounted for a total of 35.7%, including 27.8% for Hong Kong alone. The other
regions in the world were not important destinations for China’s FDI at all, with
Europe accounting for 4.1%, Africa accounting for 3.2%, North America accounting


                                          8
for 2.6%, and Oceania accounting for 1.7%. When compared with the share of world’s
aggregate FDI flows to different regions, we see that the shares of China’s FDI flows
in Asia and Latin America were significantly higher than those of the world’s, but its
shares in Europe, North America and Oceania were very low, whereas its share in
Africa was below the world average in 2003, above the world average in 2004, and
close to the world average in 2005.
    Asia’s shares of China’s FDI stocks in 2003 – 2005 were more than three times
those of Latin America, the second largest share among all regions in this period.
Clearly, China’s substantial flows to Latin America were a relatively recent
phenomenon. The shares of Africa, Europe, and North America were in the range of
1-3%. When compared with the share of world’s aggregate FDI stocks in different
regions, we see that the shares of China’s FDI stocks in Asia and Latin America were
significantly higher than those of the world’s, but its shares in Europe, North America
and Oceania were very low, whereas its share in Africa was below the world average
in 2003 and 2004, and slightly above the world average in 2005.
    Ignoring Cayman Islands and British Virginia, the top 10 recipients of China’s
FDI in 2005 were Hong Kong (which is also a tax haven), South Korea, US, Russia,
Australia, Germany, Sudan, and Kazakstan. In 2004, Indonesia, Singapore, and
Nigeria replaced South Korea, Germany, and Kazakstan. Both lists were indicative of
the role of natural resources found in Africa, central Asia, and Southeast Asia.
    Given that 81% of China’s total FDI in 2005 was made in the world’s tax havens,
and at least 78% of its FDI in 2004 was made in three tax havens which led the list of
top 10 destinations, the true breakdown of the destination of China’s FDI was
basically unknown. Our attempts to obtain information about China’s actual
investment destinations from news databases and the annual reports of publicly listed
Chinese companies, unfortunately, proved to be unsuccessful.
II.4.        Organization Background of Chinese Investing Entities
    The bulk of China’s FDI was made by country’s state owned enterprises (SOEs),
in particularly those large multinational companies that were administered by the
Central Government’s ministries and agencies. The shares of FDI flows in 2003-2005


                                           9
made by SOEs under the Central Government were 73.5%, 82.3%, and 83.2%,
respectively. Their shares of FDI stocks by the end of 2004 and 2005 were 85.5% and
83.7%, respectively. The remaining shares of FDI flows and stocks were made by
SOEs administered by regional governments and non-SOEs that are owned
collectively and privately. 6 At the end of 2004, the 30 Chinese multinational
companies with the largest stocks of FDI accounted for 80.4% of China’s total FDI
stock. Over 20 of them were SOEs administered by the Central Government. The
remainder included the listed companies Lenovo, TCL, Beida Jade Bird, and other
listed companies that are owned by the regional governments of Beijing, Shanghai,
and Guangdong.


II.        Determinants of China’s Outward FDI Flows: A Gravity Model Analysis
       China’s Ministry of Commerce (2006) has released data on the FDI flows and
stocks by destination in 2003-2005. There were 134 host economies in the sample for
FDI flows and 166 host economies in the sample for FDI stocks. However, due to lack
of macroeconomic data for many of these economies for some years, we are forced to
use two substantially smaller sub-samples, namely, a sub-sample of 85-90 host
economies for flows and a sub-sample of 77-83 host economies for stocks. The
gravity equation to be estimated for the purpose of uncovering the determinants of
China’s outward FDI is as follows:

log( FDI i ,t ) = α + β1 ⋅ log(GDPi ,t ) + β 3 ⋅ log( PGDPi ,t ) + β 2 ⋅ log(disti ) + β 4 ⋅ Chineselang i
                    + β 5 ⋅ Borderi + β 6 ⋅ Landlocki + β 7 ⋅ Island i + β 8 ⋅ Dummyt

where FDIit stands for China’s FDI flow to (or FDI stock in ) economy i in year t,
GDPit and PGDPit stand for the host economy’s real GDP and per capita real GDP,
                   7
respectively;          disti stands for the distance between the economy’s capital and
Beijing, ChineseLangi is a dummy variable for the use of the Chinese language,

6
    In China, the provincial level regions include provinces, provincial level autonomous regions, and provincial
level municipalities directly administered under the central government. In 2004, private firms in China accounted
for a mere 1.5% of the country’s total FDI flow.
7
    The estimation results are qualitatively similar whether the GDP of host economies was measured in nominal or
real terms.




                                                        10
Borderi stands for its sharing a common border with China, Landlocki indicates that it
is a landlocked economy’s, and Islandi indicates that it is an island economy.
     Since FDI that goes into “tax havens” and “offshore financial centers” will
typically be invested elsewhere, they are not the ultimate destination of the FDI. In
order to avoid the influence of FDI that went to economies with tax havens and
offshore financial centers, we carried out the estimation of the gravity equation first
by using the full sample, and then by excluding such economies. As the definition of
“tax heaven” or “offshore financial center” is not unambiguous, there are many
country lists of tax heavens and of offshore financial centers. For the purpose of this
study, we adopt the two most widely used lists, namely, the “tax heaven” list issued by
OECD in 2000,8 and “offshore financial center” list issued by IMF in 2006.9
       The estimation results of the gravity equation for FDI flows are reported in
Table 6 and those for FDI stocks are reported in Table 7. The results in Table 6 reveals
that, as expected, the host economies’ GDP had a positive impact whereas their
respective distances from China had a negative impact on attracting China’s FDI. In
contrast, the host economy’s per capita GDP had no impact at all. The landlocked
economies also seemed to be at a disadvantage in attracting Chinese FDI. Sharing a
common border with China (which included some landlocked economies) had no
impact at all. While the use of the Chinese language had a positive impact on China’s
FDI, there were only four such economies in the world.10 As in other cases, the
coefficient for “Chineselang” in Hong Kong, Macao, and Singapore captures the
positive impact of their common culture and custom with China, and in the case of


8
   The OECD report listed 35 countries/regions as tax heavens: Andorra, Anguilla, Antigua and Barbuda, Aruba,
Bahamas, Bahrain, Barbados, Belize, British Virgin Islands, Cook Islands, Dominica, Gibraltar, Grenada,
Guernsey/Sark/Alderney, Isle of Man, Jersey, Liberia, Liechtenstein, Maldives, Marshall Islands, Monaco,
Montserrat, Nauru, Netherlands Antilles, Niue, Panama, Samoa, Seychelles, St Lucia, St. Christopher & Nevis, St.
Vincent and the Grenadines, Tonga, Turks & Caicos, US Virgin Islands, Vanuatu
9
   IMF report listed 46 countries/regions as offshore financial center: Bahrain, Andorra, Aruba, Hong Kong SAR,
Belize, Anguilla, Grenada, Ireland, Bermuda, Antigua & Barbuda, Lebanon, Luxembourg, Cayman Islands,
Bahamas, Malaysia (Labuan), Malta, Cyprus, Barbados, Marshall Islands, Switzerland, Gibraltar, British Virgin
Islands, Nauru, Guernsey, Cook Islands, Turks and Caicos Islands, Isle of Man, Costa Rica, Jersey, Dominica,
Macao SAR, Liechtenstein, Mauritius, Netherlands Antilles, Monaco, Niue, Montserrat, Palau, Samoa Panama,
Seychelles, St. Kitts and Nevis, Singapore, St. Lucia, St. Vincent and the Grenadines, Vanuatu
10
    Outside China, the Chinese language is used in Hong Kong, Macao, Singapore, and Taiwan. However, China’s
outward FDI in Taiwan was zero due to policy restrictions on the part of Taiwan’s government. Using the
regression estimates contained in Table 6, the forecast FDI flow from China to Taiwan in 2005 would be about
US$180-200 million, depending on whether tax haven economies are excluded.



                                                      11
Hong Kong and Macau it probably also captures their political affiliation with China.
       The estimation results about China’s FDI stocks as contained in Table 7 are
similar to those contained in Table 6, with the exception that per capita GDP had a
significantly negative coefficient, suggesting that in the past China’s FDI tended to be
negatively correlated with the level of development of the host economies. To the
extent that FDI flows are more volatile than stocks, one could argue on theoretical
grounds that the gravity model has greater validity for stocks than for flows, and thus
has greater explanatory power, 11 and hence the negatively relationship between
China’s FDI and the per capita GDP of the host economies should not be ignored.


III.      China’s Future Outward FDI
       In this section, we attempt to forecast China’s outward FDI in the near future
based on the past experiences of the world’s economies in their outward FDI. We shall
first use China’s own past experience with FDI outflows to forecast its future
aggregate FDI flows. Then we shall use the experiences of all economies for which
relevant data are available to forecast China’s future aggregate FDI flows. Finally, we
shall use the experiences of Japan and South Korea, two East Asian economies that
are more advanced than China in both their stages of economic development and their
overseas investment, not only to forecast China’s future aggregate FDI flows, but also
to provide reference points for the FDI flows’ sectoral composition and geographical
distribution.


IV.1       China’s Future Aggregate Outward FDI Flows Based on Its Own Past
Experience
       First we use China’s own FDI flows from 1982 to 2006 to estimate the growth
trend of these flows, assuming that the growth rate was the same throughout the entire
period. The result is given in Figure 2, in which a straight line is fitted to the log of
China’s FDI flows over the period. Based on the estimated growth trend, forecasts of

11
   When the two regression equations use the same set of explanatory variables, the R2 for stocks is indeed greater
than that for flows. However, the number of observation for flows was larger than that for stocks.



                                                        12
China’s FDI flows from 2003 to 2020 are provided in Table 8. As shown in the table,
the forecast flows for 2003 and 2004 exceeded their actual values, but the forecasts
for 2005 and 2006 fell short of their actual values. More problematic is that the
forecast for 2009 is less than the actual value of 2006, raising serious doubts about the
validity of these forecasts.
       There are good reasons to believe that there was a structural change in China’s
outward FDI in recent years (e.g., abundant foreign reserves, relaxed approval
processes, government encouragement, etc.). Thus, the constant growth rate obtained
from historical data would underestimate future FDI flows. For this reason and the
“poor” performance of the forecasts from 2005 to 2009, we have decided to ignore
these forecasts, or at most to treat them as lower bounds.


IV.2       China’s Future Aggregate Outward FDI Flows Based on Experience of
Many Economies
       We use a sample of economies that had outward FDI and the required
macroeconomic statistics to estimate their FDI outflows as a function of key
macroeconomic variables, the time trend, and if applicable, their status as tax havens
or offshore financial centers. We then use the estimated equation to calculate the
predicted values for China’s outward FDI flows by feeding the values of forecast
Chinese macroeconomic variables into the estimated equation.
       The equation for outward FDI flows is as the following:
log( Fi ,t ) =
β1 ⋅ log(GDPi ,t ) + β 2 ⋅ log( PGDPi ,t ) + β 3 ⋅ log( FRi ,t ) + β 4 ⋅ Openi ,t + β 5 ⋅WTH i ,t + β 6 ⋅ t + C

where Fi ,t is economy i’s outward FDI flow at time t, GDPi ,t and PGDPi ,t are the

economy’s real GDP (constant prices: chain series) and per capita real GDP,12 FRi ,t

stands for its foreign reserves, Open stands for its degree of openness as measured




12
  Data on real GDP are obtained from PWT6.2, while data on population are obtained from the World Bank’s
World Development Indicators.



                                                      13
by its total trade/GDP ratio,13             C is a constant, and WTH i stands for a dummy

variable associated with the status of tax heaven or off-shore financial center but
weighted by its relative importance in attracting FDI (i.e., its inward FDI divided by

the world’s total inward FDI). The variables Fi ,t , FRi ,t , exports and imports are

adjusted with the U.S. CPI index with 2000 as the base year.14
     The estimation results are reported in Table 9. They indicate that real GDP, per
capita real GDP, foreign reserves, and openness all had a significantly positive impact
on the source economies’ outward FDI flows. The coefficients were similar regardless
of whether the OECD list of tax havens or the IMF list of offshore financial centers
was used. After controlling for real GDP, per capita real GDP, foreign reserves, and
openness, there was no significant time trend. It is interesting that the coefficient of
real GDP was slightly below unity, and that for per capita real GDP was slightly above
unity, with the latter suggesting that the stage of economic development is an
important determinant of FDI outflows.
     To calculate the forecast FDI flows for China using the estimated equations
contained in Tables 9, we need to have actual and forecast Chinese macroeconomic
data. The foreign reserves and openness data for 2003-2006 are actual figures.
Because PWT 6.2 contains data only up to 2004, we estimate China’s real GDP in
2005 with the PWT’s 2004 data and the growth rate of its real per capita GDP in 2005
as reported by the World Bank. For 2006 real GDP, we assume that the growth rate of
per capita real GDP was 8%.
     For the forecast period of 2007 - 2020, we make the following assumptions about
China’s real GDP, per capita GDP, foreign reserves, and openness
     a)         Its population growth rate during the forecast period will stay at its
                average growth rate during the period of 1994-2004, namely, 0.659% per
                annum;
13
   The total trade/GDP ratio of an economy is given the ratio of the nominal value of the sum of its exports and
imports to its nominal GDP.
14
   Data on foreign reserves, exports, imports, and U.S. CPI are obtained from the World Bank’s World
Development Indicators and IMF’s IFS statistics, and data on outward FDI flows are obtained from the
UNCTAD’s FDI database




                                                      14
    b)       Its real per capita GDP during the period of 2007-2015 will grow at the
             average growth rate during the period of 1994-2004, namely, 8% per
             annum;
    c)       Its real per capita GDP growth rate from 2016-2020 will slow down to
             6.5% per annum;
    d)       Its foreign reserves from 2007 will be equal to 10% of real GDP
             throughout the entire forecast period; alternatively, its foreign reserves
             will remain at US$ 1.2 trillion (the actual level in mid-2007, but at 2006
             constant prices) throughout the entire forecast period;
    e)       Its openness will be equal to 65% throughout the entire forecast period;
    China’s foreign reserves and openness grew rapidly in last several years, but their
high growth rates are unlikely to be sustainable. Indeed, the Chinese government has
already taken steps to control their unusually high growth rates. So we assume that
throughout the entire forecast period its openness will be 65%, which is slightly
higher than its value in 2006. Similarly, since China’s foreign reserves might not grow
proportionately with its real GDP, we make an alternative assumption that it will stay
fixed at a level recorded in mid-2007 (but in 2006 price). Notice that because China’s
foreign reserves grew much faster than its real GDP in the first half of 2007, China’s
future foreign reserves under the assumption of 10% real GDP will not exceed US$1.2
billion until 2009, with corresponding implications for the forecasts of China’s annual
FDI flows.
    The forecasts based on the estimation results reported in Table 9 and the above
assumptions are reported in Table10. Since actual figures of foreign reserves were
used for the four years (2003-2006) when actual FDI outflow data are available, the
forecasts for these years were independent of the assumption about the size of future
foreign reserves. The forecasts of FDI flows for 2003 and 2004 were above the actual
figures, but those for 2004 and 2005 were quite close, especially if the OECD list is
used instead of the IMF list.
    According to Table 10, China’s FDI outflow is forecast to exceed US$20 billion
around 2008, and US$30 billion in the early 2010’s. By 2015, the annual flow is


                                          15
forecast to exceed US$50 billion. If the FDI flows of world’s leading investors were
to remain at their 2004 and 2005 levels, then China could have moved up to No. 11-13
by 2008, No. 9-11 by the early 2010’s, and No. 4 or higher by 2015. Apparently, the
FDI outflows of the leading investors are expected to increase as well. As a result,
China might not be ranked within the top 10 before 2010, and still outside the top five
till 2015.


IV.3       Forecasting China’s Future Outward FDI with Japan and South Korea’s
Past Experiences
       In this section, we analyze the evolution paths of Japan and Korea’s past outward
FDI and use their experiences to forecast China’s future outward FDI. Japan and
Korea are China’s two significant East Asian neighbors that had gone through stages
of economic development that China is expected to go through in the future, including
their experiences with outward FDI. In terms of per capita real GDP, China’s present
development stage is similar to Japan’s in the 1960s and Korea’s in the 1980s.15 In
Section I, we noted that Hong and Sun (2004), by comparing growth trends, found
that China’s aggregate FDI outflows during 1988-2002 were quite similar to those of
South Korea during the same period and to those of Japan in 1968-1982. In the
following, however, we take a different approach, namely, that we shall match China’s
stages of economic development (as measured by per capital real GDP) with those of
South Korea and Japan.
Forecasting China’s Aggregate FDI Outflows
       Figure 3 and 4 depict, respectively, Japan’s aggregate outward FDI flow from
1965 to 2006 and and Korea’s aggregate outward FDI flow from 1980 to 2006. From
these figures we observe that each country experienced two high growth periods of
outward FDI flow. From 1968 to 1973, Japan’s FDI flow increased by about 627%,
and from 1985 to 1989 its flow increased by about 380%. Similarly, from 1989 to
1996 Korea’s outward FDI flow increased by about 781%, and from 2003 to 2006 the

15
  According to PWT6.2, in 2004 China’s real per capita GDP (at Laspeyres constant prices) was US$ 5, 333,
which was close to that of Japan in 1962 (US$ 5, 550) and of Korea in 1983 (US$ 5, 457).



                                                   16
flow increased by about 140%. Interestingly, Japan’s real per capita GDP (measured at
Laspeyres constant prices) in 1968, 1973 and 1985 was US$9,286, US$13,359 and
US$17,434, respectively, and Korea’s real per capita GDP (at Laspeyres constant
prices) in 1989, 1996 and 2003 were US$8,689, US$14,115 and US$17,595,
respectively. For these two countries, US$8,500, US$14,200 and US$17,000 appeared
to be three watersheds of outward FDI.
    If China’s growth rates in the future are as assumed in Section IV.2, then its per
capita GDP will reach US$8,500 in around 2010, US$14,200 in around 2017, and
US$17,000 in around 2020. If Japan and Korea’s experiences were to be repeated in
China, then China’s outward FDI flow will continue to grow steadily for three years
before it jumps up in 2010. However, considering the fact that China’s regional
greater disparity in income and the fact that outward FDI tend to originate mostly
from the more advanced regions, the jump may occur well before 2010.
    The growth rates of Japan and Korea’s outward FDI flow appear to be nonlinear,
as reflected by jumps at critical levels of economic development. To capture this
nonlinearity, we estimate a model in which the coefficient of per capita real income
depends on which of the following four development levels the investing country
finds itself: (0) less than US$ 8,500; (1) between US$ 8,501 and US$ 14,200; (2)
between US$ 14,201 and US $ 17,000; and (3) greater than US$ 17,001. More
specifically, we estimate the following regression model with Japan and Korea’s data:

    log( Fi ,t ) = β1 log(GDPi ,t ) + γ i + α1 ⋅ l1 ( PGDPi ,t ) + α 2 ⋅ l2 ( PGDPi ,t ) + α 3 ⋅ l3 ( PGDPi ,t )

where Fi ,t is the country i' FDI outflow (measured at constant price) in time t,
                            s

GDPi ,t is its real GDP (constant prices: chain series) in time t, γ i captures country

i' fixed effect, ll ( PGDPi ,t ) is the dummy variable for development level l.
 s

Because of the small size of sample, other independent variables are excluded. The
estimation results are given in Table 11, which shows that the coefficient for real GDP
was significantly positive. Among the three dummy variables, only that for
development level 1 was significantly positive.



                                                      17
    Before we can provide forecasts for China’s future FDI outflows with the above

regression model, we need to choose a reasonable value of γ China to capture the fixed

effect of China. To obtain a value for this fixed effect, we choose 2004 and 2005 as
two alternative benchmark years and assume that its actual FDI outflow in each
benchmark year was equal to its predicted flow. With all the requisite parameters, we
can do forecast as in Section IV.1 by making the same assumptions about China’s
annual growth rate of per capita real GDP, namely, 8% from 2007 to 2015, and 6.5%
from 2016 to 2020. Two sets of forecasts are contained in Table 12, one with 2004 as
the benchmark year and the other with 2005 as the benchmark year.
    Like the forecasts provided in Table 10, the forecast FDI flows provided in Table
12 for 2003 and 2004 overshot their actual values (by definition neither overshooting
nor undershooting in 2004 when it was used as a benchmark year), whereas those for
2005 and 2006 undershot their actual values (by definition neither overshooting nor
undershooting in 2005 when it was used as a benchmark year). Since the forecasts
with 2004 as the benchmark year were substantially below their actual figures in 2005
and 2006, and likely to be below that actual figures in 2007 and beyond, we have
decided not to use the forecasts with 2004 as the benchmark year.
    Finally, since the forecasts based on Japan and South Korea’s experiences using
2005 as the benchmark year exceed those based on the experience of many sources
economies, we shall use the latter as our baseline forecasts and the former as our
upper bound forecasts for China’s future aggregate FDI outflows.


Forecasting the Sectoral Composition and Geographical Distribution of China’s FDI
Outflows
    Next, we analyze the sectoral composition of Japan and Korea’s FDI flows.
Figure 5 and 6 illustrate the percentages of Japan and Korea’s outward FDI flows in
different sectors, respectively. Before 1982, the mining sector was an important target
of Japan’s FDI, averaging about 20%. After that year, the sector’s share fell to below
5%. Korea’s experience around 1990 was similar. Before 1989, the share of



                                          18
investment in the mining sector was more than 10%, but it fell to about 5% by 1994.
In contrast, the two countries’ shares of investment in the services sector grew
gradually over time. After 2000, Japan’s share of investment in the services sector was
about 50%, whereas Korea’s share wais about 40%.
    Notice that the decline of Japan’s FDI in the mining sector occurred in its
development stage 2 as defined earlier in this subsection, whereas the decline of South
Korea’s FDI in the same sector occurred right from the beginning of its development
stage 1. Also, South Korea’s high share of FDI in the services sector occurred in its
development stage 2, whereas Japan’s high share of FDI in the same sector occurred
long after it passed into its development stage 3. That is to say, South Korea’s sectoral
composition followed similar changes as Japan’s, but the pace of change was much
faster, implying that there seemed to be less similarity in the two countries’ evolution
of their sectoral composition than in the evolution in their aggregate FDI outflows.
    Let us compare China’s sectoral composition of FDI flow with those of Japan and
Korea. In 2004 and 2005, China’s share of investment in the mining sector was
32.74% in 2004 and 13.29% in 2005. Since China’s present stage of economic
development is similar to that of Japan in the 1960s and Korea in the 1980s, we
expect China’s investment in this sector will continue to grow until China’s real per
capita GDP reaches the range of US$ 10,000, which is expected to occur in 2012. The
average share of China’s investment in manufacturing sector was 13.74% in 2004 and
10.09% in 2005, less than Japan in the 1960s and Korea in the 1980s. Thus, we expect
China’s share in investment in the manufacturing sector to grow steadily, but probably
not dramatically.
    China’s investment in the services sector was 48% in 2004 and 75% in 2005,
which were significantly higher than those of Japan and Korea in the 2000s. Judged
against the experiences of Japan and South Korea, it seems curious why China’s
investment share in the services sector was so high. One may speculate that it was a
result of China’s capital control policy, which induced Chinese firms to invest in
offshore financial centers before they were re-invested elsewhere in other non-service
related sectors (including “round-tripping” back to China). If Japan and Korea’s


                                           19
sectoral compositions in outward FDI had predictive value for China’s, we would
expect China’s investment share in the services sector to decline over time due to
increases in the shares of mining and manufacturing, and in the longer run in response
to China’s liberalization of capital movements.
      Figure 7 and 8 depict the shares of Japan and Korea’s FDI flow to different
regions. A comparison of these figures with those for China contained in Table 4
indicates that the share of China’s outward FDI flow to Asia in 2003-2005 was
broadly similar to those of Japan in 1960s and Korea in 1980s. However, China’s
shares of investment flows to Europe and North America in the same years were
significantly less than those of Japan and Korea’s in their respective comparable
periods. In contrast, China’s share of investment flow to Latin America was
abnormally higher than Japan and Korea’s. Again, this could be a result of the huge
investment in tax havens in Latin America. Despite this special factor, we expect
China’s share of FDI flows to Latin America will decrease in the future, while its
share of investment in North America and Europe will grow.
      Japan’s average FDI share in Africa from 1965 to 1985 was 3.6%, higher than
that of China in 2003-2005. However, it declined significantly after 1985 and reached
a negligible 0.3% in 2004. Compared with Japan, South Korea’s FDI share in Africa
was relatively low in the entire period. During 1990-1998, its average share was about
2.3%. It African share began to decrease after 1998, and by 2004 it dropped to 0.85%,
which was less that China’s current share. We expect China’s future African shares to
be higher than the current shares of Japan and S. Korea because Africa is politically
much more important to China than to Japan and S. Korea.


IV.      Summary and Directions for Further Research
      In this paper we have provided a systematic analysis of the size and composition
of China’s outward FDI in 2003-2005, using data provided by China’s Ministry of
Commerce. In addition, we have made an attempt to uncover the determinants of the
direction and amount of China’s outward FDI by estimating a gravity equation.
Finally, we attempt to forecast China’s future FDI outflows based on its own past


                                          20
experience, international experience, and Japan and South Korea’s experience with
FDI outflows.
     Our empirical analysis of the determinants of China’s outward FDI received by
different host economies reveals that the host economies’ GDP had a positive impact
whereas their respective distances from China had a negative impact on FDI from
China. Their per capita GDP had no impact on FDI flows but a negative impact on
FDI stocks. Cultural proximity was a positive factor in attracting China’s FDI to the
host economies that speak the Chinese language.
     Our baseline forecasts based on the experience of many FDI source economies
indicate that China’s aggregate FDI outflow will reach US$20 billion around 2008,
US$30 billion in the early 2010’s, and US$50 billion by 2015. In more optimistic
forecasts based on the experience of Japan and South Korea, the first two thresholds
will be reached one year earlier and the third threshold will be reached five years
earlier.
     The number of host economies included in the sub-sample we used in estimating
China’s outward FDI flows was 65-70. This sub-sample is substantially smaller than
the full sample of 134 host economies. Thus, the first direction of research is to
expand the sample size as the 2005 macroeconomic data of host economies not
already included in our sub-sample become available. A second direction of further
research is to consider the impact of other potential factors that could have an impact
on China’s outward FDI, including bilateral trade, China’s inward FDI from its host
economies, etc. A third direction of research, which goes beyond China’s outward FDI,
is to identify the key determinants of outward FDI flows and stock for the world’s
leading investing economies.




                                          21
References
Antkiewicz, Agata and John Whalley, “Recent Chinese Buyout Activity and the
Implications for Global Architecture,” Working Paper 12072, National Bureau of
Economic Research, Cambridge, MA 02138, March 2006.
Cai, Kevin G., “Outward Foreign Direct Investment: A Novel Dimension of China’s
Integration into the Regional and Global Economy,” The China Quarterly, Vol. 160
(1999), pp. 856-880.
Child, John and Suzana B. Rodrigues, “The Internationalization of Chinese Firms: A
Case for Theoretical Extension?” Management and Organization Review 1:3,
pp.381-410.
China Ministry of Commerce, 2003 Statistical Bulletin of China’s Outward Foreign
Direct Investment. September 2004.
------------------, 2004 Statistical Bulletin of China’s Outward Foreign Direct
Investment. September 2005.
------------------, 2005 Statistical Bulletin of China’s Outward Foreign Direct
Investment. September 2006.
Deng, Ping, “Outward Investment by Chinese MNCs: Motivations and Implications,”
Business Horizons, Volume 47 (No. 3, May – June 2004), pp. 8-16.
Hong E., Sun L. “Go Overseas via Direct Investment: Internationalization Strategy of
Chinese Corporations in a Comparative Prism,” Centre for Financial and Management
Studies, SOAS, University of London, January. 2004.
Taylor, Ian, “Unpacking China’s Resource Diplomacy in Africa,” Working Paper,
School of International Relations, University of St. Andrews and Department of
Political Science, University of Stellenbosch, South Africa, undated. 2007.
Woo, Yuen Pau, Zhang, Kenney, “China Goes Global: The Implications of Chinese

Outward Direct Investment for Canada,” Vancouver: Asia Pacific Foundation of

Canada ,2005,

Zweig,   David,    “‘Resource   Diplomacy’ under       Hegemony:      The     Roots   of
Sino-American Conflict in the 21st Century,” Paper prepared for the Conference on
“The Rise of China and Its Implications for Asia-Pacific,” Academia Sinica, Taipei,


                                          22
25-26 August 2006.




                     23
Appendix
Table 1: China’s Outward FDI Flows in Relation to the World’s Total FDI
Flows*
                         2002     2003       2004      2005      2006
China’s outward FDI flow
                          2.7      2.85       5.5      12.26     16.1
(US$ Bn)
World’s total FDI flow
                         539.5    561.1      813.1     778.7     N.A.
(US$ Bn)
Percentage (%)            0.50     0.51      0.68       1.57     N.A.
*The percentages reported in this table are slightly different from those reported in the Ministry of
Commerce’s Statistical Bulletins from 2003 and 2004. The percentages reported in these bulletins
were taken as percentages of the world’s total FDI flows in the preceding instead of the same
years.



Table 2: China’s Outward FDI Stocks in Relation to the World’s Total FDI
Stocks by Year End+

                                  2002          2003         2004          2005          2006
   China’s outward FDI
                                     22.9          33.2         44.8          57.2          73.3
   stock (US$ Bn)
   World’s total FDI stock
                                   7684.1        9046.3       10325.2       10671.9         N.A.
   (US$ Bn)
   Percentage (%)                    0.29          0.37         0.43          0.54          N.A.

     + The percentages reported in this table are slightly different from those reported in the
     Ministry of Commerce’s Statistical Bulletins from 2003, 2004 and 2005. The percentages
     reported in these bulletins were taken as percentages of the world’s total FDI stocks in the
     preceding instead of the same years.




                                                 24
    Table 3: Values and Shares of China’s Outward FDI by Sector



                                             Flow                                Stock
                                                    +                                   +
                                             2003            2004      2005      2003       2004      2005

Agriculture,   forestry,          Value
                                               85.5           288.66    105.36     332       834.23    511.62
animal husbandry, and             (US$ M)
fishery                           Share
                                                 3             5.25      0.86       1         1.86      0.89
                                  (%)
Mining, quarrying         and     Value
                                               1380           1800.2   1675.22     5900     5951.37   8651.61
petroleum                         (US$ M)
                                  Share
                                               48.4           32.74     13.66       18       13.29     15.12
                                  (%)
Manufacturing                     Value
                                                620           755.55    2280.4     2070     4539.07   5770.29
                                  (US$ M)
                                  Share
                                               21.8           13.74     18.60      6.2       10.14     10.09
                                  (%)
Services                          Value
                                               763.8          2643.4   8198.58    24833     33470.9    42280
                                  (US$ M)
                                  Share
                                               26.8           48.08     66.87      74.8      74.75     73.91
                                  (%)
              Business Services   Value
                                                280           749.31   4941.59     1992     16445.5   16553.6
                                  (US$ M)
                                  Share
                                                9.8           13.63     40.30       6        36.73     28.94
                                  (%)
           Wholesale and Retail   Value
                                                360           799.69   2260.12     6530     7843.27   11417.9
                                  (US$ M)
                                  Share
                                               12.6           14.55     18.43      19.7      17.52     19.96
                                  (%)
     Transportation and Storage   Value
                                               85.5           828.66    576.79     1992     4580.55   7082.97
                                  (US$ M)
                                  Share
                                                 3            15.07      4.70       6        10.23     12.38
                                  (%)


    + The 2003 figures are subject to rounding errors, because the values by sector, if not explicitly
    provided in the 2003 Statistical Bulletin of China’s Outward Foreign Direct Investment, are
    calculated from the sector percentages and aggregate FDI figures.

    Sources: Ministry of Commerce, China (2004, 2005, 2006), World Investment Report (2006)




                                                        25
    Table 4. Values and Shares of China’s FDI Flows by Region

                                  2003              2004             2005
Values of China’s Outward FDI Flows (US$ Million)
                          Asia           1498.95           3000.27          4374.64
                         Africa             74.79           317.42           391.68
                        Europe            151.14            170.92           505.02
                Latin America            1038.15           1762.72          6466.16
                North America               57.74           126.49           320.84
                       Oceania              33.88           120.15           202.83
Shares of China’s Outward FDI Flows (%)*
                          Asia              52.51            54.57            35.68
                         Africa              2.62             5.77              3.19
                        Europe               5.29             3.11              4.12
                Latin America               36.37            32.06            52.74
                North America                2.02             2.30              2.62
                       Oceania               1.19             2.19              1.65
Relative ratio of China’s Outward FDI flows**
                          Asia               2.32             2.22              1.54
                         Africa              0.79             2.39              0.95
                        Europe               0.10             0.09              0.08
                Latin America                4.63             2.66              5.37
                North America                0.18             0.12              0.16
                       Oceania               0.48             0.34          -0.47***
Source: China’s data from Ministry of Commerce, China (2006), world’s data from
UNCTAD’s FDI database
* The share of China’s outward FDI flow to region = China’s outward FDI flow to
region / China’s aggregate outward FDI flow
** The relative ratio of China’s outward FDI flow = The share of China’s outward FDI
flow to region/ The share of world’s FDI flow to region
***The world’s outward FDI to Oceania in 2005 was negative




                                             26
Table 5. Values and Shares of China’s Outward FDI Stocks by Region


                                  2003               2004              2005
Values of China’s Outward FDI Stocks (US$ Million)
                           Asia          26559.39           33409.53          40629.04
                         Africa            491.22             899.55           1595.25
                        Europe             531.52             746.66           1598.19
                 Latin America            4619.34            8268.37          11469.62
                North America              548.49             909.21           1263.24
                        Oceania            472.26             543.94            650.28
Shares of China’s outward FDI Stocks (%)*
                           Asia              79.94             74.61             71.02
                         Africa               1.48              2.01              2.79
                        Europe                1.60              1.67              2.79
                 Latin America               13.90             18.47             20.05
                North America                 1.65              2.03              2.21
                        Oceania               1.42              1.21              1.14
Relative ratios of China’s Outward FDI Stocks**
                           Asia               5.08              4.83              4.15
                         Africa               0.61              0.81              1.07
                        Europe                0.03              0.03              0.06
                 Latin America                1.85              2.47              2.43
                North America                 0.08              0.10              0.11
                        Oceania               0.47              0.36              0.42
Source: China’s data from Ministry of Commerce, China (2006), world’s data from
UNCTAD’s FDI database
* Share of China’s outward FDI stock to region = China’s outward FDI stock to region /
China’s aggregate outward FDI stock
** Relative ratio of China’s outward FDI to region = Share of China’s outward FDI
stock to region/ Share of world’s FDI stock to region




                                              27
Table 6. Regression Results for Recipient Economies of China’s Outward FDI
Flows (2003-2005)

                        Full Sample             Tax heaven              Offshore financial
                                                economies (OECD         center economies
                                                list) excluded          (IMF list) excluded+
Lgdp                     0.19092***                0.19771**             0.12186
                         (0.09126)                 (0.09683)             (0.09850)
lpgdp                   -0.03279                   -0.05522              0.03845
                        (0.12215)                  (0.12736)             (0.13382)
Ldist                    -0.66497***               -0.72739***          -0.77280***
                         (0.25011)                 (0.24894)            (0.24668)
Chineselang             3.08849***                  3.12671***
                        (0.88245)                   (0.87893)
Border                   0.59051                   0.49398               0.35393
                         (0.54221)                 (0.53724)             (0.55300)
Landlock                -1.12738***                -1.15676**            -1.17475***
                        (0.37163)                  (0.36907)             (0.37610)
Island                   0.01256                -0.08298                 0.03032
                         (0.36282)              (0.36667)                (0.39059)
R2                      0.2816                  0.2856                  0.2012
Observations            270                     261                     250
NOTE: ***, ** and * indicate significance at 1, 5 and 10 percent levels, respectively; standard
deviations are provided in parentheses
+ Since Hong Kong, Macau, and Singapore appeared on the IMF list, and Taiwan had no FDI
from China, the Chineselang dummy became irrelevant for the sample that excluded offshore
financial center economies.




                                              28
Table 7 Regression Results for Recipient Economies of China’s O1utward FDI
Stocks (2003-2005)

                       Full Sample                Tax heaven countries   Offshore financial
                                                  (OECD list) excluded   center countries (IMF
                                                                         list) excluded+
Lgdp                    0.43515***                0.45613***             0.39634***
                        (0.08944)                 (0.09715)              (0.09556)
lpgdp                   -0.37382***               -0.38295**             -0.34832***
                        (0.11961)                 (0.12500)              (0.12658)
Ldist                   -0.58251**                -0.60620**             -0.64497***
                        (0.23456)                 (0.23623)              (0.23063)
Chineselang             5.03551***                5.08122***
                        (0.82054)                 (0.82996)
Border                  0.13683                   0.06474                -0.18495
                        (0.50166)                 (0.50416)              (0.51017)
Landlock                -0.84598**                -0.81338**             -0.93641***
                        (0.35298)                 (0.35706)              (0.35890)
Island                  0.11106                   0.03690                0.13657
                        (0.36219)                 (0.37499)              (0.40217)
R2                     0.3964                     0.3930                 0.2748
Observations           248                        240                    230
NOTE: ***, ** and * indicate significance at 1, 5 and 10 percent levels respectively; standard
deviations enclosed in parentheses
+ Since Hong Kong, Macau, and Singapore appeared on the IMF list, and Taiwan had no FDI
from China, the Chineselang dummy became irrelevant for the sample that excluded offshore
financial center economies.




                                             29
Table 8. Forecast of China’s Outward FDI Flow Based on Linear Model


          Year          Forecast                Actual Value

          2003            6.12                     2.85
          2004            7.20                     5.50
          2005            8.53                     12.26
          2006           10.09                     16.13
          2007           11.56                      NA
          2008           13.25                      NA
          2009           15.18                      NA
          2010           17.39                      NA
          2015           34.34                      NA
          2020           67.81                      NA


Table 9. Regression Results for Source Economies’ Outward FDI Flows
(1970-2004)

                     0.9165***         0.84893***
    Lrgdp
                     (0.05156)         (0.05227)
                     1.19265***        1.18534***
    Lprgdp
                     (0.05735)         (0.05695)
                     0.22289***        0.25433***
    Lre
                     (0.04481)         (0.0448)
                     0.00873***        0.00479***
    Open
                     (0.00109)         (0.00125)
                     -0.00699          -0.007
    Year
                     (0.00516)         (0.00509)
    WTH (OECD)       0.00026648***
                     (0.00007802)
    WTH (IMF)                          0.0000668***
                                       (0.00000963)
    R2               0.6556            0.6604
    Observation      2536              2536
    NOTE: ***, ** and * indicate significance at 1, 5
    and 10 percent levels, respectively; standard
    deviations are provided in parentheses




                                              30
Table 10. Forecasts of China’s Outward FDI Flows

    Year        Forecast based on Table 8 and         Forecast based Table 8 and      Actual
                OECD list                             IMF list                        Value
                Foreign         Foreign               Foreign         Foreign
                reserves will   reserves will         reserves will   reserves will
                be 10% of       be US$ 1.2            be 10% of       be US$ 1.2
                real     GDP    trillion from         real GDP        trillion
                from 2007       2007
    2003                 6.37             6.37                5.81            5.81       2.85
    2004                 8.83             8.83                7.86            7.86       5.50
    2005                12.07            12.07               10.60           10.60      12.26
    2006                15.69            15.69               13.69           13.69      16.13
    2007                18.39            18.93               15.94           16.47        NA
    2008                22.02            22.24               19.02           19.24        NA
    2009                26.36            26.14               22.69           22.47        NA
    2010                31.56            30.72               27.06           26.24        NA
    2015                77.62            68.82               65.37           56.99        NA
    2020               162.15          133.06               134.54          107.36        NA


Table 11. Regression Results of the Outward FDI Flows of Japan (1965-2004)
and Korea (1981-2004)

       lrgdp               2.62109          (0.31818)***
                           0.42293           (0.25037)*
       α1
                           0.22870         (0.35259)
       α2
                           0.29950           (0.45017)
       α3

           R2             0.9948
       Observations       64
           NOTE: ***, ** and * indicate significance at 1, 5
           and 10 percent levels respectively; standard
           deviations enclosed in parentheses




                                                 31
Table 12. Forecasts of China’s Outward FDI Flows Based on Japan and Korea’s
Experiences

     Year      2004 as benckmark   2005 as benckmark   Actual Value

     2003             4.38                 7.33                2.85
     2004             5.50                 9.19                5.50
     2005             7.34                12.26               12.26
     2006             9.45                15.80               16.13
     2007             11.77               19.66                NA
     2008             14.65               24.48                NA
     2009             18.23               30.47                NA
     2010             34.64               57.88                NA
     2015            103.50               172.97               NA
     2020            227.59               380.34               NA




                                     32
Figure 1: China’s outward FDI Flow: 1982 to 2006 (US$ million)




Source: Ministry of Commerce, China (2006, 2007). Data for 1982-2001 are based on
various issues of UNCTAD’s World Investment Report whereas data for 2002-2006 were
compiled by the ministry.


Figure 2. Linear Time Trend of Log of China’s outward FDI Flow (Constant
price)

  12

  10

   8

   6

   4

   2

   0
       1982

              1984

                     1986

                            1988

                                   1990

                                          1992

                                                 1994

                                                        1996

                                                               1998

                                                                      2000

                                                                             2002

                                                                                    2004

                                                                                           2006




                            Log of China's Outward FDI Flow              Trend




                                                 33
Figure 3. Japan’s Outward FDI Flow (million US$ at 2000 constant price),
1965-2006

  100000
    90000
    80000
    70000
    60000
    50000
    40000
    30000
    20000
    10000
         0
             1965

                     1968

                            1971

                                   1974

                                          1977

                                                 1980

                                                        1983

                                                                1986

                                                                        1989

                                                                                 1992

                                                                                          1995

                                                                                                 1998

                                                                                                        2001

                                                                                                                  2004
Sources: Japan External Trade Organization (JETRO) and International Financial Statistics (IFS)




Figure 4. Korea’s Outward FDI Flow (million US$ at 2000 constant price),
1980-2006*


  10000
    9000
    8000
    7000
    6000
    5000
    4000
    3000
    2000
    1000
       0
           1980

                    1982

                            1984

                                   1986

                                          1988

                                                 1990

                                                         1992

                                                                 1994

                                                                          1996

                                                                                   1998

                                                                                             2000

                                                                                                    2002

                                                                                                               2004

                                                                                                                         2006




Sources: Korea Eximbank and IFS. FDI figures were deflated by US CPI.
* The figure for 1980 stands for the cumulated outward FDI flows up to 1980.




                                                                 34
Figure 5 Japan’s sectoral distribution of outward FDI flows: 1965-2004



  1.2

    1

  0.8

  0.6

  0.4

  0.2

    0
        1965
               1967
                      1969
                             1971
                                    1973
                                           1975
                                                  1977
                                                         1979
                                                                1981
                                                                       1983
                                                                               1985
                                                                                      1987
                                                                                              1989
                                                                                                      1991
                                                                                                             1993
                                                                                                                     1995
                                                                                                                             1997
                                                                                                                                    1999
                                                                                                                                           2001
                                                                                                                                                   2003
               Agriculture & Fishery                Mining             Manufacturing                  Services              Others


Sources: JETRO




Figure 6. Korea’s sectoral distribution of outward FDI flow: 1980-2006*

   1.2

        1

   0.8

   0.6

   0.4

   0.2

        0
            1980

                      1982

                                1984

                                           1986

                                                     1988

                                                                1990

                                                                              1992

                                                                                       1994

                                                                                                     1996

                                                                                                              1998

                                                                                                                            2000

                                                                                                                                     2002

                                                                                                                                                  2004

                                                                                                                                                          2006




                   Agriculture & Fishery                         Mining               Manufacturing                     Services              Others

Sources: Korea Eximbank.
* The figures for 1980 refer to cumulated outward FDI flows up to 1980.




                                                                               35
     Figure 7. Japan’s regional distribution of outward FDI flow: 1965-2004

  1.2

    1

  0.8

  0.6

  0.4

  0.2

    0
        1965

                1968

                        1971

                               1974

                                       1977

                                               1980

                                                      1983

                                                             1986

                                                                    1989

                                                                           1992

                                                                                  1995

                                                                                         1998

                                                                                                  2001

                                                                                                         2004
               Africa     Asia        Europe      Latin America        North America            Oceania


Sources: JETRO



Figure 8. Korea’s regional distribution of outward FDI flow: 1980-2006*


  1.2

    1

  0.8

  0.6

  0.4

  0.2

    0
        1980

                1982

                        1984

                               1986

                                       1988

                                               1990

                                                      1992

                                                             1994

                                                                    1996

                                                                           1998

                                                                                  2000

                                                                                         2002

                                                                                                 2004

                                                                                                         2006




               Africa     Asia        Europe      Latin America        North America            Oceania


Sources: Korea Eximbank
* The figures for 1980 refer to cumulated outward FDI flows up to 1980.




                                                             36

								
To top